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From Europe, Mounting Pressure Over Greece’s Debt

PARIS — Facing market pressure to resolve the Greek debt crisis once and for all, President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany will hold a video conference call Wednesday evening with the embattled Greek prime minister, George Papandreou, French officials announced on Tuesday.

The announcement could portend yet another restructuring of Greek debt to stave off a default. A stopgap bailout plan announced on July 21 has yet to be approved by all 17 nations that share the euro currency, and in recent weeks a renewed sense of crisis has engulfed the euro region.

In the latest sign of turmoil, Italy — the euro region’s most indebted member, after Greece — was forced to pay record-high interest rates in order to complete an auction of its five-year bonds on Tuesday, despite continuing purchases by the European Central Bank. Spain, which plans a bond sale on Thursday, could be subjected to similar investor wariness.

Plans were clearly being laid Tuesday for a serious conversation with Mr. Papandreou. His government has proved incapable so far of making the kinds of legal changes and budget cuts in the middle of a deep recession that Athens has promised its European partners and the International Monetary Fund.

France, where shares of the biggest banks have plummeted recently on fears of exposure to Greece’s debt, is pressing for a stronger signal from Germany that Europe will act to resolve the Greek matter before it spreads further contagion.

Despite the stepped-up pace of economic diplomacy, Europe’s response to the debt crisis still appeared to be behind the curve. That was underscored by the announcement that Timothy F. Geithner, the United States Treasury secretary, will make a rare appearance at an informal meeting of European finance ministers to be held Friday in Wroclaw, Poland. The trip will be Mr. Geithner’s second across the Atlantic in a week, following the Group of 7 session in Marseille, France, last weekend.

“Clearly the U.S. Treasury is disappointed with the direction of the European debt crisis and is looking for action, before further sections of the banking system are drawn in and a global financial crisis is revisited,” Chris Turner and Tom Levinson, strategists at ING, said in a research note.

Growing concern in Washington about the euro crisis and the damage it is doing to the markets and the global economy was also expressed by President Obama, meeting with Spanish-speaking journalists in Washington.

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Chancellor Angela Merkel of Germany shortly before a meeting with the Finnish prime minister in Berlin on Tuesday. Credit
Thomas Peter/Reuters

Mr. Obama urged European leaders to step up their efforts. “In the end the big countries in Europe, the leaders in Europe, must meet and take a decision on how to coordinate monetary integration with more effective coordinated fiscal policy,” Mr. Obama said, according to the Spanish news agency EFE.

Mr. Sarkozy met Tuesday evening at the Élysée Palace with Herman Van Rompuy, the president of the 27-nation European Council, to discuss the euro crisis, but neither man spoke afterward to the press. Mr. Van Rompuy has been asked by Germany and France to head a similar council of the 17 euro zone nations.

France and Germany are pressing to put into place the decisions made at the last euro zone summit meeting on July 21, which called for raising the total bailout fund to 440 billion euros ($598 billion). Germany, whose participation would be the most crucial financially and politically, is among the many countries that have yet to ratify that agreement.

Mrs. Merkel, who is working to win a ratification vote in the Parliament this month, said on Tuesday that Germany would ensure there would be no “uncontrolled default” of Greece that could pull down the euro zone. An uncontrolled default would be the equivalent of Greece’s simply walking away from its debts, whatever the consequences, rather than undergoing the equivalent of supervised bankruptcy proceedings.

“It is our top priority to avoid an uncontrolled default,” Mrs. Merkel said, “because it would hit not only Greece. The danger would be very high that it would hit many other countries.”

Mrs. Merkel’s mention of default was significant, because there is increasing skepticism that even the second bailout of Greece would be enough to bring it to a sustainable level of debt.

The Dutch finance minister, Jan Kees de Jager, said on Tuesday that he was studying the possible consequences of a Greek default.

“We’re currently preparing for many scenarios and possible shock effects,” Mr. De Jager said in an interview with the broadcaster RTLZ. He declined to comment when asked whether euro zone officials were preparing for a default of Greece.

“I can’t do that in public,” he said. “I’m not denying it, but I can’t confirm it either.” Markets have already priced in the near-certainty of a Greek debt default. Credit-default swap prices — the cost to insure Greece’s debt against default — suggest a probability of default of as much as 98 percent in the next five years, according to pricing data provider Markit.

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Nicolas Sarkozy, the French president, greeted Herman Van Rompuy, left, president of the European Council, on Tuesday.Credit
European Pressphoto Agency

For European banks, the cost to insure their debt of European banks against default remained high, but slightly off Monday’s record levels. For Société Générale, one of France’s most beleaguered banks, the credit-default rate hit a new high Tuesday, at 4.29 percent. At the end of June, it was 1.3 percent.

The aim of European leaders is to isolate Greece’s problems as much as possible, even if that means the kind of debt restructuring — and steeper losses for Greek bondholders — that the leaders denied they would ever contemplate six months ago. Officials hoped to reassure the financial markets that other weak members of the euro zone could work out their problems without formal debt restructurings.

Portugal and Ireland, with subsidized loans under a European Union and I.M.F. program, look as if they might be able to make sufficient economic adjustments. And the Spanish and Italians have been working — more successfully in Spain than Italy — to cut their deficits and debt to try to appease the markets.

In the meantime, the European Central Bank has been buying Spanish and Italian bonds to try to hold the yields down — purchases that an expanded bailout program could continue if it is ratified.

So far, the central bank’s efforts have not been consistently successful.

On Tuesday, the Italian treasury sold $5.3 billion worth of a five-year bond at an average yield of 5.6 percent — the highest interest on such bonds Italy has been forced to pay since the formation of the euro union in 1999.

Meanwhile, the yield on 10-year Italian bonds, while down slightly at 5.63 percent on Tuesday, was still uncomfortably close to the 6 percent level that is considered to be unsustainable.

One obstacle to ratification of the expanded bailout fund has been Finland’s demand for collateral.

Mrs. Merkel met on Tuesday with Finland’s prime minister, Jyrki Katainen, and said afterward that she believed a solution would be reached. “All of us want to find and will find a path that is open to the principles of all partners but still fulfills the Finnish requirements,” Mrs. Merkel said.

She also expressed confidence that Greece was back on the right path and would get its loans.

France and Germany agree with Mr. Obama that more fiscal coordination is vital across the euro zone. But getting there will take longer than markets would prefer, because a serious integration would require a treaty change. And there has been little from European leaders, especially Mrs. Merkel, to indicate a deep grasp of the crisis and how to fix it.

“Politicians don’t understand the language of markets, and it’s becoming more of a problem,” said Kurt Hübner, head of the Institute for European Studies at the University of British Columbia in Vancouver. “They have to speak with one tongue, not 17 or so.”

Correction: September 14, 2011

An earlier version of this article incorrectly stated the day on which Spain intends to complete a bond sale. The sale will occur on Thursday; it did not occur on Wednesday.

Reporting was contributed by Nicholas Kulish and Judy Dempsey in Berlin, Matthew Saltmarsh in London, Elisabetta Povoledo in Rome and Graham Bowley in New York.

A version of this article appears in print on September 14, 2011, on page B1 of the New York edition with the headline: In Europe, Mounting Pressure. Order Reprints|Today's Paper|Subscribe